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New Bankruptcy Rules in Canada: The Bad News, and the Good News

After waiting for four years, the new bankruptcy rules finally come into force on September 18, 2009. The new rules will have a significant impact on many Canadians in financial trouble.

When the new rules were announced in August I posted a summary of what you need to know about the new bankruptcy rules in Canada. If you are not familiar with the new rules, this is a good summary.

I also posted an article on the most radical new change: the surplus income rules have changed, so bankruptcy will now last longer for many Canadians. Under the old rules most first time bankruptcies lasted for nine months. Now, if your monthly net income is more than $200 higher than the limit set by the government, your bankruptcy will last an extra year, and you will be required to make payments to your creditors for an extra year.

Here’s a simple example: Fred is single with no dependants, and he earns $2,470 per month in take home pay, after taxes. The surplus income threshold for a single person in 2009 is $1,870 per month, so Fred has $600 per month of surplus income. He is required to pay $300 per month in surplus income payments for the length of the bankruptcy.

Under the old rules if this was Fred’s first bankruptcy and there were no objections, Fred’s bankruptcy would probably last for nine months, so his surplus income payments of $300 per month would last for nine months.

Under the new rules Fred is automatically bankrupt for 21 months, so his surplus income payments of $300 per month will last for 21 months.

That’s the bad news. The good news is that it will now be easier to file a consumer proposal as I reported last week. Under the old rules you could only file a consumer proposal if your debts were $75,000 or less. Now you can file a consumer proposal if your total debts, not including the mortgage on your principal residence, are less than $250,000. That will make it easier for many Canadians to avoid bankruptcy and file a consumer proposal.

Unfortunately it was only on August 19, 2009 the government announced that these new rules were coming into force on September 18. That means that trustees across Canada have only had 30 days, in the middle of the summer vacation season, to prepare for the new rules. That means there will be lots of confusion surrounding the new rules, so we will all need to be patient as we work through the new calculations, rules and directives.

My biggest complaint is that these new rules were created back in 2005 when the Canadian economy was booming. The federal government decided that the bankruptcy process was too easy, and needed to be lengthened. That may have made sense in 2005, but it’s now 2009 and we are in the middle of the most serious recession in our lives. Now is not the time to make the bankruptcy process even more difficult for the average Canadian. In hindsight it would have been nice if the government had delayed lengthening the bankruptcy process until the recession was over.

I also worry that the government has introduced new disclosure requirements. Now, when you go bankrupt in Canada, you are required to disclose your highest level of education. You must now tell the creditors whether or not you graduated from high school or university. Personally, I find this new disclosure requirement offensive. I don’t think whether or not you are a high school graduate is relevant. The creditors need to know what you own and who you owe, but information about your educational background is not necessary for them to evaluate your situation. What’s next? Questions about your ethnic background? Religion? Where does this end?

However, regardless of my opinions on the new rules, they are here. Some people will benefit from the new rules, others will not. Regardless, you should deal with a trustee that fully understands the new rules, so please consult a Canadian bankruptcy trustee to arrange a no charge initial consultation to review your situation and determine which option is best for you to deal with your debts.

4 Responses to “New Bankruptcy Rules in Canada: The Bad News, and the Good News”

maryam said...

i filed for bankruptcy on sep15,2009(signed docs) and i recieved year end bonus that autumatically goes into my RRSP.does new rule of surplus income and 21month extension applies to me? my take home is 1961/mnth..this is my firt time(and last) filing for bankruptcy.

John Farrugia said...

My trustee has told me that I’m in arrears of $ 2700.00 dollars, dating back to April 18th, 2010.. I’m in my 14yh month of my 21 month bankruptcy.. We are going into mediation with the Superintendant of Trustees. My question is, would I have to pay all the money I have been told that I owe.. I;m now retired and single since Jan.2011.on a fixed income of $ 2400.00, monthly..

TrusteeJ said...

Mediation with the Office of the Superintendent of Bankruptcy won’t occur until after the 21 months is finished, so it’s possible that you will have already paid the amount you owe by then. If not, you should discuss this with your trustee before your mediation, so that you can work out a suitable arrangement with your trustee. If you can’t, you can discuss it at the mediation, or if the mediation fails you will have a court discharge hearing, at which point you can raise your concerns with the court.